South Africa is one of the most developed economies in Africa boasting robust economic and financial systems, but its massive cryptocurrency adoption has allowed crypto scams to rise.
Crypto Scams in South Africa
In fact, it is among the first countries in the region to enact solid crypto laws. While it has a good name in online trading, South Africa has been hit the hardest by crypto scams. Perhaps it is one of the main reasons why it decided to create robust crypto regulations.
You have probably heard about scams that have eloped with millions of US dollars from investors. And you are probably wondering: why are crypto scams so common in South Africa? Well, we shall look at the major causes, but first, here are the two biggest scams in the country for context.
There are numerous types of crypto scams including Fake initial coin offerings, fake websites, and unscrupulous promoters. But in South Africa, Ponzi schemes have been the biggest type of scam, with investors losing at least 69,000 Bitcoin which according to the BTC to ZAR exchange rate equals 54.65B ZAR or nearly 4B USD.
Mirror Trading & Africrypt
Mirror Trading is a crypto scam that operated a crypto trading club with promises of a 10% return. However, it disappeared with $170 million of investors’ money in 2020. This was named the biggest crypto scam of 2020, but that was before Africrypt happened.
Africrypt dwarfs all the previous scams. In April 2021 it sent the investors email claiming that the platform had been hacked. However, some investors became suspicious when one of the founder brothers asked investors not to involve the authorities. Before they could take the necessary steps to recover their money, the scammers absconded with $3.8 billion.
In these instances, the Financial Sector Conduct Authority finds itself in a conundrum because it can’t investigate the crypto assets simply because they are not categorized as financial assets. To make it worse, the tech-savvy fraudsters use money mules making it hard to trace the money.
But why are Crypto Scams Prevalent in South Africa? Here are the top causes.
Top causes of crypto scams
The Lure for Get-Rich-Quick Schemes
If there is a single factor that has made South Africans lose money through crypto investment, it is the high-yield investment products. Here is one of the most common methods. Victims are required to invest in coin offerings with a promise of high returns in the future. These investments usually do not materialize. Before the investor knows the founder will be nowhere to be seen.
Scammers have also devised yet another way. Investors are promised unsolicited offers by scammers who pose as investment managers. In other words, the investors relinquish their crypto to people posing as portfolio managers.
Crypto mining deals are also part of the projects that are too good to be true. The masterminds of the Ponzi scheme claim to rent out crypto mining machines with promises of high returns. Unsuspecting customers rent or buy the mining technology without verifying they exist. But that is not all. Yet another method involves luring unsuspecting traders to scammy websites with crypto jargon, fake testimonials, and reviews.
South Africans have experienced a fair share of Ponzi schemes involving Bitcoins. These schemes promise over ambitious high returns where investors are paid using money from new recruits. Some of these deals have several investment tiers. The more you put in the more returns. Unfortunately, during withdrawal, you are asked to pump more money and end up losing.
Unclear Regulatory Environment
Without clear government licensing, self-regulation, and best practices, crypto investors are left on their own to choose institutions for crypto storage or investment. This means that there are no laws or institutions mandated to license or regulate market players. Therefore, it is challenging to differentiate legit crypto investments.
This is, for instance, not the case in forex in South Africa, where companies have to be licensed by the local regulator FSCA that approves brokers to legally operate in the country. South African brokers can then accept Paypal, or other payment methods that are popular in SA. Given the fact that South Africa has one of the strongest regulatory frameworks on the continent when it comes to the financial field. It means, it is in the power of the South African government to govern the crypto market, they just have to find the most effective way to do so.
Social Media Influencers
The crypto buzz has been a leading cause of investment scams. With massive price proliferation, everyone wants to venture into crypto investment. With skyrocketing values, crypto enthusiasts and investors congregate online to hype the industry. Curious to join the bandwagon, new crypto investors play into the hands of scammers.
Celebrities are usually used to lure people into scams. The influencers post videos of glam lifestyle on Youtube, Tik Tok, and Instagram. If they are not riding high-end cars, they are living their best lives in luxe hotels and visiting all the swanky destinations in the world. They trick the young ambitious generation about living a good lifestyle if they invest in crypto.
For example, the influencers promise that you will get double the crypto amount after sending crypto to their accounts. Unfortunately, you only realize you have been dubbed when it is too late. Some people have reportedly sent crypto to Elon Musk imposters.
Similarly, scammers use dating sites. After establishing a long romantic relationship, they use their charm to rope in the investors into nonexistent crypto opportunities. While crypto investment means taking risks, investors should be cautious to avoid falling into the hands of fraudsters.
Lack of Proper Understanding of Crypto and Widespread Confusion
The complexity of the blockchain and crypto technology is an asset used by scammers. Victims lack the technological know-how to assess whether a certain crypto investment is technically feasible or whether the individual or company offering the crypto product has a clear plan of solving any market need.
Many people don’t understand the process of crypto investment. Given the massive popularity of crypto and its growing value, they think all cryptocurrencies are one and the same thing. As a result, they unknowingly fall for dubious deals. These snake oil sellers have perfected the mastery of selling hot air. It is not hard to see why many people, especially the old, fall for their scams.
There is a need for government attention
The prevalence of fraud has been quite high in South Africa. Unfortunately, the scammers are technology-savvy people who use the Bitcoin pools to hide their ill-gotten wealth. In fact, in the case of Africrypt, it was impossible to trace the cash. Worse still, there were no elaborate regulations although the government has made a huge stride in developing these regulations.
Many people believe that Bitcoin is supposed to be anonymous and untraceable. As a result, it has become a safe haven for scammers and criminals. For instance, there are cases of kidnappers in South Africa asking for ransom in Bitcoin, because they believe it is fake and can’t be traced.
Forensic blockchain and the establishment of KYC laws in dealing with crypto activity will go a long way to safeguard users and reduce this criminal activity. In fact, the crypto regulations are a work in progress in South Africa. The regulators plan to set KYC regulations before dealing with investor protection guidelines. With these laws in place, crypto-based scams will be a thing of the past.